What the Budget means for Investors

Posted on Wednesday, May 11 2011 by Australian Property Investor MagazineThe Federal Budget, announced by Treasurer Wayne Swan, has both good and bad news for property investors, according to the Real Estate Institute of Australia (REIA).REIA president David Airey says one of the positives in the Budget is that the much speculated changes to negative gearing arrangements have been rejected.However, he adds there are no measures to assist first homebuyers."This is a market segment that desperately needs assistance to fund home purchase," Airey says.The Housing Industry Association's senior economist, Andrew Harvey, agrees. "The Budget fails to deliver any dedicated policies to alleviate Australia's chronic housing shortage, which at around 200,000 dwellings and growing, continues to place pressure on the household budgets of homebuyers and renters," Harvey says."New home building activity is in danger of revisiting global financial crisis-like levels, yet the Budget fails to address the excessive cost of new housing which, in some instances, sees more than 40 per cent of the purchase price of a new house attributable to government taxes, fees and charges."One of the biggest concerns is that the Budget will do little to stave off expected increases in interest rates. This is mainly due to the fact that a $50 billion deficit is now tipped for the current year. Airey says some critics believe the government's spending cut-backs aren't strict and given the critical state of affordability in the property market, it's a huge concern."If inflation continues to rise, that seems to be the Reserve Bank's total focus. They are preoccupied with inflation. Our view is that it will have an even more negative impact on the market and in particular for investors. In a market with low or negative capital growth, ownership expenses are continuing and one of the biggest expenses is interest rates."There's nothing in there that we can see that's positive for the property market. "They've delayed the National Rental Affordability Scheme. There's lack of rental accommodation and little incentive to invest. Investors and first homebuyers have virtually disappeared from the market."Airey says higher-priced property will probably be most affected if there are more interest rate rises and as a result, the property market is unlikely to see capital growth in the immediate future."The highly priced properties have been extremely hard to sell and they've had a fall in values. The biggest factor that people haven't factored in is the huge drop in the number of sale transactions. In Perth it's dropped by 40 per cent. Perth's had the first real slowdown and it will flow into other cities. It's going to have a very negative impact on values and employment right through the property sector."Chan and Naylor director Ken Raiss adds the continuing Budget deficit will "adversely affect" both the economy and investors."The Budget deficit will force interest rates up. That will dampen confidence and consumer spending and it will have a direct impact on families and small businesses. It will dampen the appetite for investment properties, but I think the other worrying thing is that with lower supply of property available, it's going to put increasing pressures on rent."The ordinary mum and dad who are renting and trying to get into the property market are going to be hit on both sides, it's going to be a crushing blow."Raiss believes the government also didn't "fix up" uncertainty and confusion in relation to super fund borrowing."That's a sector of the market that could have been investing in property and is now very gun-shy with the issues, especially with some of the confusing comments coming out of the government about renovations or what happens if your property is destroyed by a natural disaster. All that put together is making the banks a little bit too conservative in lending into that sector, so we're finding that someone who could have been a significant investor with self-managed super funds is being scared away from entering what could have been a very good property investment market."HOW MUCH COULD RATES RISE BY?CommSec economist Savanth Sebastian says investors should factor in "one to two" interest rate rises within the next 12 months."We're expecting a rate hike in August and possibly a second one in November or December," he says."In the short term there will be weakness, which will provide buying opportunities because vendors will have to be more realistic."He says population growth and rental yield will be the key driver over the next couple of years and the fact that there aren't tax breaks in the Budget for the first time in eight years shows the government is trying to follow a disciplined factor."The Reserve Bank will see there's no stimulus factor," he says."The Reserve Bank will be squarely focused on inflation now. The property sector has a period of consolidation and in terms of inflation, the Reserve Bank has said they're willing to focus on the longer term."In the short term the property market has lost a lot of momentum and the Reserve Bank has pointed out that growth for the March quarter has gone backwards."However, Terry Ryder from hotspotting.com.au says the Reserve Bank has made it clear in the past that it's happy with where interest rates are sitting and investors shouldn't be too concerned about the daily "interest rate spin"."Whether interest rates will rise or not should be irrelevant to an investor," he says."If you're looking to invest or buying an investment, it means the mortgage you take on is normally a 25 or 30-year commitment. In the three decades interest rates will rise and fall. What's going to happen with interest rates is irrelevant and if you're worried about interest rates you're approaching investing in the wrong way. You need a long-term view."INFRASTRUCTURESydney's west may have recently enjoyed a mini property boom, but Urban Taskforce chief executive Aaron Gadiel says the decision to wipe $150 million in funding for the F3 to M2 project is "very disappointing", particularly after the Labor Government promised to progress the motorway project in its 2007 election commitment."This effectively puts this major motorway project on ice," he says."This link would have replaced Pennant Hills Road  -  a part of the national highway network that wasn't upgraded when the M7 was completed."However, the Pacific Highway will be duplicated at a cost of $1 billion. The Tourism and Transport Forum welcomes the announcement and says it will "better align" urban planning and infrastructure.An estimated $6.6 billion will be spent rebuilding Queensland too (most of which will come through the flood levy).Over $4.7 billion will be spent on helping business and communities in flood-affected areas across Queensland, more than $950 million will help individuals and businesses affected by Cyclone Yasi and $500 million will help recovery in Victoria. This is obviously good news for these areas, which desperately need confidence injected back into them.For investors in regional Australia, there's some spending planned on infrastructure. The government has committed to:•complete the remaining section of the Townsville Ring Road (up to $160 million)•upgrade the intersection between the Bruce and Capricorn Highways (up to $40 million)•Build the Gladstone Port Access Road (up to $50 million)•Construct a new interchange along the Warrego Highway to Blacksoils (up to $54 million)•Upgrade the Peak Downs Highway (up to $120 million)•Upgrade the road network around Perth airport (up to $480 million)Some investment will also go into capital cities. The Lord Mayors of Australia's capital cities welcomed $180 million in Australia's cities for more productive and sustainable cities, including $20 million for urban renewal projects and public spaces, $61 million to reduce congestion through smarter roads and motorway infrastructure and $100 million to support employment centres.Gadiel says the promise of a $36 million 'top-down' strategic review of infrastructure would also help sharpen the Federal Government's accountability for its funding decisions."This move gives Infrastructure Australia the resources and mandate it needs to take the lead on identifying projects for federal funding," Gadiel says."This will remove the Commonwealth's ability to blame state governments for poor quality funding submissions."Gadiel adds the $100 million four-year initiative to fund employment hubs in suburban areas is a practical measure to reduce congestion in our big cities."Instead of banning or stopping urban expansion, they're now talking about pro-actively supporting employment growth."A $20 million scheme to fund urban renewal projects is welcome, says Gadiel, but the funding is modest."This Commonwealth should be neck-deep in its support for urban renewal initiatives, but this program is really just a toe in the water."